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ServiceNow signs extended partnership with Microsoft as it eyes government sector

ServiceNow saw a 32% uplift in its second quarter numbers, up to $833.9 million, ahead of analyst expectations.

ServiceNow CEO John Donahoe has highlighted how the enterprise cloud vendor is working more closely with Microsoft, particularly in partnership on the Azure platform, to advance its progress with government buyers.

The news comes as ServiceNow released its strong second quarter numbers. The firm turned in a loss of $11.1 million, down year-on-year from $52.7 million, while revenues rose to $833.9 million, up 32% from $631.1 million last year. Those are ahead of analyst consensus expectations.

The company also reported 39 transactions worth over $1 million in net new annual contract value were signed during the quarter, bringing the total number of such customers to 766, a 33% year-on-year growth, while the renewal rate stands at 98%. Donahoe said:

Seventeen of our top 20 deals involved three or more products. And we landed several large deals in the financial services, technology and automotive industry that involved multiple IT products. In fact, we signed one of our largest new customer deals ever with a major financial institution, which purchased most of our IT portfolio.

We also had significant wins in CSM (Customer Service Management) with three deals over $1 million. Our customer workflow products enhanced customer operations management. We help customers manage better their inbound contacts, identifying the root causes of customer issues, working to fix those issues to prevent future problems and automating self-help solutions that creates great experiences and better outcomes.

However, despite the growth, the numbers still failed to impress Wall Street. Why? For that, look to subscription revenues. Again, the growth here is strong - up 33% to $781 million. But Wall Street had been looking for more. ServiceNow’s outlook for the rest of the year - $836 million-$841 million in the third quarter, and $3.29 billion-$3.3 billion for the full year - also fell short, sending the share price down.

Government push

As noted above, ServiceNow last week signed an extended partnership deal with Microsoft to use Azure as a preferred - not exclusive - cloud platform with an eye to expanding its government footprint in the first instance and other highly-regulated sectors beyond that. Donahoe explained:

This partnership will enable us to more fully leverage and integrate our platform and products with Microsoft’s leading enterprise technology and capabilities. And using Microsoft Azure for workloads in highly regulated industries will help accelerate digital transformation for enterprise and public sector customers.

With ServiceNow available through Azure Government, US government agencies will be able to leverage the compliance coverage across regulatory standards available through Azure. The US Federal Government continues to look to ServiceNow as an important strategic partner as it modernizes its IT infrastructure and accelerates the use of modern technology to digitally transform how they operate.

He added:

This actually started in some ways last year, when we announced an intent to work with Microsoft with particular focus on the US Federal business. What that really led to was the realization that we could take advantage of the highest security clearance that Azure has in the Federal business. There are certain data sovereignty and other security requirements we have - what’s called IL-4 or FedRAMP High - which has enabled us to build a tremendous Federal business.

Microsoft has the absolute highest security clearance IL-6. And so we just determined that it would have made sense building that data center capacity for that market as well as for few other Federal markets, for Federal Government markets that we take advantage of Azure and as part of that. So we’re taking that into their capability and then that’s led to a broader conversation around how we can work together and combined our go-to-market efforts.

Our product lines are very complementary with each other. In fact, we have over 20 integrations with Microsoft products that’s the largest of any partner, customers really look to us to work seamlessly together. So, we’re coming together to try to make it easier for customers and easier for our go-to-market teams to support each other, both in the Federal market, but also, we think over time in the general marketplace.

It’s not just the US government sector that is in focus here, he added, citing Germany as a case in point:

One of the markets that we’re particularly focused on and excited about is Germany. Germany was, relative to other markets, a little later in embracing cloud. German multi-nationals, the German government had more questions are around security of cloud, privacy of data and things…we’ve been having some of the European governments saying we want to do business with you but you got to have global data sovereignty or you got to have complied with local data regulations and that’s where the Azure partnership potentially future partnerships like that will help us accelerate our ability to serve that part of the European business.

My take

A bump in the road as far as Wall Street was concerned, but it’s the same scenario that we’ve seen time and again with firms in high-growth ascendency - the need for speed takes over among investors, any perceived sign of a slowdown and disappointment kicks in and the share price takes a short-term hit. In reality, ServiceNow’s ongoing performance continues to impress. Adjusting expectations for the rest of the year now ought to calm overly-twitchy Wall Street watchers. Keep calm and carry on - nothing to worry about here long term.

Image credit - Image sourced via Pixabay

Disclosure - ServiceNow is a diginomica/government premier partner at time of writing.